Markets Are Braced For A Global Downturn

A war, of any type or magnitude, can be disastrous and can have widespread ramifications. Under the Make America Great Again mandate the United States government has taken a slew of measures that in their own way have impacted lives and economies, across the globe. The US-China trade conflict is one such ongoing issue that has become a thorn for global growth and economic stability.

Recent, the US had cited lack of progress on trade talks and announced that it would impose 10% tariffs on the remaining USD 300bn of imports from China from September 1, 2019 onwards. In response, China has indicated that it would take countermeasures. Trade wars have pushed global growth to a multi-year lows. The new rounds of tariffs have increased the downside risks significantly. If implemented, global growth is likely to remain weak in H1CY20.  Manufacturing and trade have weakened. Inflationary pressures in developed markets have fallen. The transition to a low-growth, disinflationary environment, and with it the next rate cut cycle, has happened in fast forward mode. 

Central banks globally like the Federal Reserve, European Central Bank, Bank of England and Bank of Japan, stand prepared to provide additional monetary policy support in an attempt to stem flailing growth. While these measures might be effective in containing downside risks, they will certainly not be sufficient to fuel a recovery. The market expects that due to the rise in trade tensions the Fed is likely to cut interest rates twice this calendar year instead of the earlier expected one rate cut. The interest rate curves in most developed market are pointing to a slowdown. German bonds and Swiss bonds yields have turned negative. In the US and UK, the yield curve has inverted. These can be construed as the early signs of an impending global recession. Gold prices are at multi-year high and copper prices, indicative of industrial growth, are down. Oil prices have also been languishing below USD 60, despite tensions in the Middle East. Commodity prices are expected to soften further in 2020. As commodity exporters’ revenues are compressed by weak prices their contribution to world trade growth will diminish. 

Financial markets are exhibiting a lot of volatility and it is not restricted to developed market alone. Emerging markets are also exhibiting higher volatility. The economic policy at the core of the post-GFC asset inflation cycle will therefore persist while weak world trade squeezes those assets and economies which are driven by current nominal growth. Growth will be strongest in inwardly-driven countries like China and India.